Patrick Retzer of Retzer Capital Management presented his in-depth investment thesis on Franklin Covey (NYSE: FC) and School Specialty (OTC: SCOO) at Best Ideas 2018.
Franklin Covey is a global training and consulting company specializing in organizational performance improvement. The company has high gross margins and high levels of free cash flow, which enables it to buy back stock consistently, having bought $62 million in the past eleven quarters. FC is transitioning from a traditional sales revenue model to a subscription-based model. This process often initially depresses the stock price because reported results “look” unimpressive as revenue from new sales is recognized ratably over many months rather than once upon the sale. Ultimately, however, the subscription model leads to higher multiples and stock prices due to expanded margins and recurring revenue. In the last couple of quarters, the company has reported results that demonstrate it is through the toughest part of the transition and now likely in a period in which GAAP revenue, deferred revenue, and unbilled revenue show increases, as do adjusted EBITDA and earnings. This emergence is often when multiples and stock price show upside, as the company shows in the 4Q17 investor presentation. FC has reached four inflection points on different facets of the business that should also accelerate growth. Guidance for fiscal 2018 is for GAAP revenue growth of 14%, deferred revenue growth of 36%, and adjusted EBITDA growth of 30-95%. As the company reports higher margins, smoother results, and higher levels of recurring revenue over the next year or two, Patrick expects the stock price to double.
School Specialty is an under-the-radar company with a strong competitive position in the K-12 education industry. The real estate crisis decimated school districts’ budgets and SCOO was forced into reorganization, which upon emergence wiped out much debt and shrunk the market capitalization. New management, with a proven record of success, was brought in to streamline the business and position it for growth. Revenue troughed in the 4Q14 and has grown 5% while SG&A has shrunk 8%. The company has essentially been rebuilt and is positioned to grow organically and through modest acquisitions that leverage the company’s market presence. Despite revenue approaching $700 million, the market capitalization is only ~2.2x adjusted EBITDA and 18% of revenue. According to Patrick, the business has a wide and deep moat and several catalysts ahead. Management has shown tangible results since arriving at SCOO. The new “21st Century Safe School” initiative has received widespread interest and is well-timed given the current state of U.S. public education. Listed on the Pink Sheets, management appears anxious to “up-list” and broaden the investor base. Within five years, revenue may grow to $1 billion, adjusted EBITDA may reach $11 per share, and cash from operations could be $8.50 per share.
About the instructor:
Patrick Retzer spent the first several years of his career in public accounting and then developing tax planning software all while earning a Master’s in Taxation. He moved into investment management in 1987, joining Heartland Advisors, manager of the Heartland family of mutual funds in Milwaukee, Wisconsin. While at Heartland, he was portfolio manager of the Heartland US Government Securities Fund (#1 General US Government Fund for the 5 years ended 12/31/93 according to Lipper), he started and managed the Heartland Wisconsin Tax Free Fund (Wisconsin’s first double tax free fund) was co-manager of the Heartland Value Plus Fund, and managed private accounts. In 200,, Pat cashed in his chips as a shareholder of Heartland Advisors and started Retzer Capital Management, LLC and the Retzer Fund I, LP. Pat believes his 30+ years of experience in both fixed income and equity management as well as his background as a CPA and tax specialist give him a unique perspective on the financial markets.
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